Will foreign investors buy the Recklessly Ballooning US Debt? Increasingly crucial question. But yield solves demand problems.

By Wolf Richter for WOLF STREET:

As the recklessly ballooning US Treasury debt is spiraling toward $36.0 trillion, amid fears about its trajectory, investors around the world, from central banks to private investors, are facing a bizarre situation: They might fret about the trajectory of the US Treasury debt, but they like the higher yields, and they loaded up.

In September, all foreign entities combined (red line in the chart) added $170 billion to their holdings of US Treasury securities – well over half of that increase was by the Euro Area – bringing their holdings to a record $8.67 trillion, according to the Treasury Department today. Over the past 12 months, they increased their holdings by $880 billion, or by 15.4%!

The chart also shows the Top six financial centers ($2.60 trillion in blue: London, Belgium, Luxembourg, Switzerland, Cayman Islands, and Ireland); the Euro Area ($1.78 trillion, green); Japan ($1.12 trillion, gold); and China and Hong Kong combined ($1.0 trillion, purple). It’s no longer Japan and China that the US government is relying on to buy the fruits of its excesses:

Yields of US Treasury securities have remained relatively high – with short-term yields falling only a little and long-term yields, after a drop, surging again, as the Fed has lagged with its rate cuts compared to other central banks in developed economies, and that lag started from higher rates to begin with.

Today, the 10-year Treasury yield is at 4.42%, while the German 10-year yield is at 2.37% and the Japanese 10-year yield is at 1.08%.

The 3-month Treasury yield is at 4.51%, while the German 3-month yield is at 2.77% and the Japanese 3-month yield is at 0.12%.

But inflation rates are similar in those countries. So in comparison to what is out there for foreign investors in their own currencies, US Treasury yields look like a deal.

The share of foreign holdings as a percentage of the total Treasury debt U-Turned in October last year from the low point, and has been rising for 11 months to 24.5% in September, the highest since July 2022.

The six largest financial centers added $92 billion in Treasury securities in September (+3.7%) and $312 billion over the past 12 months, to a record $2.60 trillion. Since 2012, their holdings have more than tripled!

These countries specialize in handling the financial holdings of global companies, individuals, and governments. Ireland is a favorite for US mega-corporations to store their profits. So a portion of the holdings at these financial centers are actually held for US entities, and not foreign investors.

• UK (“City of London” financial center): +2.8% MoM, +26.5% YoY, to $765 billion
• Luxembourg: +3.9% MoM, +11.8% YoY, to $418 billion
• Cayman Islands: +0.1% MoM, +33.4% YoY to $420 billion
• Ireland: +1.8% MoM, +11.3% YoY, to $328 billion
• Belgium (home of Euroclear): +12.8% MoM, +15.6% YoY, to $367 billion
• Switzerland: +2.7% MoM, +8.6% YoY to $304 billion.

Euro Area v. China + Hong Kong. 

In September, China and Hong Kong combined reduced their holdings by 0.5%, to $1.0 trillion. Over the past 12 months, they’ve shed 5.3%. Since the 2015 peak, they’ve shed 31% (blue).

The countries of the Euro Area added $99 billion, or 5.9%, in September and $200 billion, or 20.4%, over the past 12 months. Since 2012, they increased their holdings by 234%, from $534 billion in 2012 to $1.78 trillion in September (red).

There have been reports that China has shifted some of its USD holdings from Treasury securities to US Agency securities due to their slightly higher yields. US Agency debt is not included here.

Japan’s holdings dipped in September by 0.5%, and declined by 5.8% over the past 12 months, to $1.12 trillion.

The Ministry of Finance and the Bank of Japan have been struggling to contain the plunge of the yen. Since early 2022, the yen has lost roughly 30% of its value against the USD because the Bank of Japan has decided that it would do almost nothing – and as late as possible – to tighten monetary policy in face of inflation, which is running at about the same rate as in the US.

The BoJ has hiked policy rates in two tiny baby steps, from -0.1% to 0.25% currently, and that’s kind of the accomplishment for the year. And it started slow-motion QT. The Ministry of Finance intervened in the foreign exchange markets multiple times, selling large amounts of USD holdings to buy yen with it.

Since 2012, Japan’s Treasury holdings jumped up and down and ended up back where they’d started out:

The United Kingdom added $21 billion (+2.8%) in September and $116 billion (+26.5%) over the past 12 months, to bring the pile to $765 billion.

The City of London is one of the top financial centers in the world, and that’s where this is taking place, and so a portion of those securities are held for US clients. The UK is also included in the Top Six Financial Centers above.

Canada added $4.8 billion (+1.3%) in September and $70 billion (+32%) over the past 12 month to $370 billion. Since March 2021, holdings have more than tripled. Since 2012, holdings have multiplied by a factor of 7!

Taiwan: +$3.8 billion (+1.3%) MoM, +$43 billion (+22%) YoY, to $288 billion:

India:  +$1.3 billion (+0.5%) MoM, +$13 billion (+8%) YoY, to $247 billion. Since 2012, its holdings have multiplied by a factor of 6:

Brazil: +$1.2 billion (+0.5%) MoM, +$10 billion (+5.2%) YoY, to $235 billion, where it had been in 2012.

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